Monday Morning Kickoff (on Tuesday)

Last week was a bit of a quieter week that previous weeks with equity prices moves somewhat less violently and interest rates moving above 2.90% but were unable to close the week at the high, instead closing in the 2.88% area. Part of the reduction in pressure on the rates may have been that the FED was a net purchaser of assets by $14 billion and for the month of February. This means that the plan of reducing the balance sheet by $20 billion a month is off just a bit so far–like $35 billion for the month as the month was a net $15 increase in the first 2 weeks. We will just have to wait and see what transpires in the weeks ahead.

For the shortened week ahead there is no really important economic data to be released. On Wednesday we have the Purchasing Manager Index (PMI) being released and the Leading Indicators on Thursday and we would be shocked if anyone attached much immediate importance to these items.

Even as interest rates stabilized, more or less, preferreds and baby bonds were off 3 cents but the number of issues trading under $25/share actually was at 212 versus 223 the week before. We use these numbers only to highly any large moves in shares – more minor moves simply show that averages are just that averages.

There was just 1 new issue which began trading last and that was the Sotherly Hotels 7.25% baby bond (NASDAQ:SOHOK) which traded a measly 652 shares on Friday, of which 200 were shares we bought (more on that purchase under a separate story). Until we see some trading tomorrow (Tuesday) we are not sure of what to make of this issue, but we highly suspect that the issue is mispriced and the supply/demand will keep the price high. Really a decent baby bond with a 3 year maturity and a 101% early redemption premium should have priced in the low to mid 6’s–oh well we shall see.




This week we will be looking for a purchase in each of the 2 models portfolios. In the High Yield Model we will be considering a mortgage REIT preferred–which one we don’t know and while we will have to buy a perpetual we hope that the reward will help compensate for the risk.

We will also look for a purchase in the Short/Medium Duration Income Portfolio after adding a couple issues last week.

Stock futures are off a bit tonight–totally meaningless with the multi hundred point swings we are likely to see all through the coming week.  The 10 year treasury is trading about 1 basis point above last weeks close at 2.89%.  Key for this week will be seeing if the 10 year trades firmly above 2.90% and closes in the 2.93-2.95% are which signals we are going to stay above 2.90% with the next move set to be 3%.

We Have Added a Short/Medium Maturity Income Issues Page

We have added a page which we call the Short/Medium Maturity Income Issues page. This is an important page to us because this is where we spend our time. It is where we invest–for the most part.

This page includes term preferreds and baby bonds maturing within a 10 year time frame. The closer the maturity date the less volatility the issue should exhibit. It should be noted that companies with financial issues, such as the REIT RAIT Financial Trust (NYSE:RAS) the baby bonds will trade based on the financial fortunes of the company.

The majority of what we own personally are issues that are contained on this page.

 

BDC Newtek Business Services Prices Baby Bond

Newtek Business Services (NASDAQ:NEWT), a BDC (business development company) has priced a new baby bond issue with a coupon of 6.25%.

The 2 million notes will have a maturity date on 3/1/2023 with an early call available starting 3/1/2020.

At this time we have not had time to review the issue in full so we don’t know if we will be a buyer.  In general the coupon is a tad bit meager for us.

Further details are here.

We note that the company will be partially or fully calling the 7% notes outstanding (NASDAQ:NEWTL).  These notes have been callable since 4/2017 and mature in 2021.

Sotherly Hotels Baby Bonds to Trade Today

The new 7.25% baby bonds of lodging REIT Sotherly Hotels have been loaded into the brokerages quote system so we expect they will begin to trade today.

Note that there is a chance that some online systems may not recognize the ticker (SOHOK) today and you have to wait until Monday.

Our intention is to buy for models as well as personal accounts.  The issue has a 3 year maturity and this short maturity date and reasonably good 7.25% coupon makes this one a strong buy for us.

 

Adding a New Issue to the Medium Duration Income Portfolio

We have added a new issue to the Medium Duration Income Portfolio.

We added a full position of Saratoga Investment (NYSE:SAR) 6.75% notes due 2023.  Of course building a portfolio at this time one ends up having to pay over $25 for the shares, but given the parameters of this portfolio we are better off making timely investments instead of waiting for a better price, which may or may not ever come.

These notes (NYSE:SAB) have a early call date of 12/21/2019 with maturity on 12/30/2023

We chose this note because a quick review of SAR shows that the majority of the loans they make are senior liens and have floating rate interest rates (84% are floating rate) attached to them.  The company has had fairly good financials in the last year or two.

With this purchase we are just over 50% invested, but with the soon to trade Sotherly Hotels baby bond (at least we hope it trades soon) we will be 60% invested in this model.

Interest Rates Back Below 2.90%

After breaching the 2.90% ceiling yesterday and trading up to 2.92% the 10 year treasury is trading at 2.88%.  Kind of a surprise, but just wait–it will change.

Utilities and REITs are up a tiny amount, while preferreds and baby bonds are treading water–guess that is better than lower, but we are relatively convinced (in our minds) that rates will move higher any second.  As we have conveyed before we don’t believe it matters at all what the FED does as the runoff of balance sheet assets will put a floor under the 10 year treasury.

We are taking the time today to identify a purchase for the Medium Duration Model Portfolio–maybe even 2 purchases.  We will post these before midnight (we do most of our work in the evening).

We are impatiently waiting for the new Sotherly Baby Bonds (NASDAQ:SOHOK) to start trading–should be anytime now, but we are not showing it on Fidelity or eTrade at this time.

A Rising Tide Lifts All Boats

Folks that publish on line are always just an article or two away from being made to look like a fool.

I made my first common stock investment in 1971–I wasn’t old enough to even sign the legal papers at the brokerage firm-had to have mom do it-she hadn’t owned a stock in her life.  It was a big purchase $50 (I thought $50 bucks was big back then).

I have read and studied on a non stop basis since that time–that is 47 years ago.

I learned quite a few years ago that I wasn’t a great investor when it came to common stocks-lots of buying high and selling low–a common issue with most individual investors.

12 years ago we started to dabble in income securities–primarily baby bonds and preferred stocks.  We liked them.  At that time it was not difficult to garner a solid 8% or so with little risk to capital.  Why would I buy common stocks when I could get 8% on a preferred or baby bond?  Sure the SP500 had an average 9.8% return over the last 100 years, but we would be absolutely thrilled with a 8% return year end and year out.

With that we quit buying common stocks–sure once in a while we lose our mind and buy something, but it isn’t very often.

In 2008 we wrote our first article on Seeking Alpha.  This was 2 years after we started publishing the 1st “Yield Hunter” website in 2006.  Talk about a crude site–that was before Google Docs and other tools were available.

Somewhere around 2009 or 2010 via email Brad Thomas and I had some communication and shortly thereafter we had a few phone conversations.  To make a long story short he wanted to partner on Seeking Alpha and other places.  He had been blown out of the real estate business during the recession and I think that he was looking for a new career.  I had a very active real estate appraisal business and I had no intention of trying to start a new career (in particular at my age–56 then).  My intention of running my little website was to learn and help other newbies learn.  There was no way that I was going to try to pass myself off as an expert–I was learning from lots of folks about income investing–after all these years I know quite a bit-BUT THE LEARNING FROM OTHERS NEVER STOPS!

A Rising tide lifts all boats.  For quite a few years REITs went up and up.  If you owned a REIT–any REIT, you made money.  If you wrote about REITs you were a hero.  Readers bowed to you at the alter of Seeking Alpha.  You launched lots of subscription websites with costs of up to $200/month.  You wrote for Forbes, you announced yourself as a publisher and share holder in themaven and continually attacked those with differing opinions.

Most of all you determined that everyone else was stupid and know nothings.  Markets didn’t understand REITs, forget that those you called a SWAN were now down 20, 30 or 50% and you refused to acknowledge that ‘the market’ knew anything.

Arrogance of publishers is deadly–IF WE EVER ACT LIKE WE KNOW IT ALL PLEASE LET US KNOW OTHERWISE.  We don’t!! We plan to learn all we can from readers, reader comments and income security forums all around the web.  Almost 65 and still learning.

I’m a caring guy and I feel sorry for Brad Thomas, he doesn’t ‘get it’.  We hope we never act like him.  We hope he realizes that investing isn’t all about being a salesman-we hope he reforms his ways.

We Personally Own These Monthly Payers

We wanted to take a minute to review some of our personal holdings that we have been highly satisfied with and most of which have been owned for years.

We are/have been high on the Gladstone Companies term preferred stocks which they have been issuing for 10 or 15 years.  They have always performed exactly as intended.

This doesn’t mean that we are positive on the individual Gladstone common shares, but we only have to be ‘so-so’ on the individual issues to own the term preferreds.

Here are some we own and may go to overweight positions, in particular if they sell much lower.

NOTE THAT FIDELITY MAY NOT ACCEPT ORDERS ON THESE ISSUES

Gladstone Capital 6% 2024 Term Preferred (NASDAQ:GLADN).

Gladstone Capital is a BDC and as such is covered by the leverage rules for senior securities, which includes preferred stock which means they must have 200% asset coverage ratio.  The company has been around since 2001 and recent financials have been acceptable–not great–not terrible.  Mandatory redemption in 2024.  We bought this on the OTC Grey market when issued in 2017.

Gladstone Investment 6.25% 2023 Term Preferred (NASDAQ:GAINM).

Gladstone Investment is a BDC and earnings recently have been better than average for the company.  They have $566 million in investments.  Mandatory redemption in 2023.

Gladstone Land 6.375% 2021 Term Preferred (NASDAQ:LANDP)

Gladstone Land is a farmland REIT (1 of 2 farmland REITs).  The company has performed ‘ok’ in a tough business right now as any farming related land company has had to navigate low commodity prices–thus low rents.  Gladstone Land concentrates on owning land for fruits and vegetables instead of corn and soybeans (like Farmland Partners) and thus has not had quite as tough a time as FPI.

Being a REIT there is NO leverage rule that applies, thus the issue may contain more risk.

Gladstone Investment 6.75% 2021 Term Preferred (NASDAQ:GAINO)

Same as the above Gladstone Investment.  Note that the shares are now redemption eligible as they became redeemable 12/31/2017.

For us owning these securities is simply a way to receive a decent (not huge) dividend while having a relative certainty of return of capital in the not distant future.

 

CPI Runs Hotter Than Expectations

As mentioned yesterday the CPI release this morning could rile the markets a bit and that is the case as the number came in a bit hotter than consensus.

The CPI came in at up 2.1% which actually is just in the upper end of the consensus range, but above the overall consensus of 2%.  Certainly this is above expectations, but honestly it isn’t a real big deal.  The big deal is just in the direction–not the number itself.  In the end it is not what we think but instead is how the markets react.

The DJIA implied opening was around up 150 points, but after the release of the number the implied open was down 300–a 450 point swing.  Cooler heads are now prevailing and the loss has moderated.

The 10 year treasury was trading around 2.82% prior to the number release, but is now trading around 2.88%–below the short term upper band of 2.90%.  We will watch this during the day to see if we are going to breach the 2.90% on a closing basis today.

It is likely we will have a bit of downward pressure on income securities today but we will not change any positions, because we try to simply be correctly positioned (correctly positioned is defined as understanding securities we own and the reaction of prices to higher interest rates and accept the level of risk inherent in particular positions).

The Calm Before the (Potential) Storm

Tomorrow with the release of the CPI at 8:30 am CST we could see a breakout of the 10 year treasury yield. To us a breakout will be a close for the day above 2.90% and of course only a stones throw from the 3% mark.

The expected range on the CPI is 1.9% to 2.3% and we can expect this breakout to occur if the reported rate is above the top end of consensus.

Investors need to once again be positioned correctly–we know we sound like a broken record.  “Correctly” means understanding the loss of capital that comes with higher rates and perpetual securities.

Of course if investors want to change positioning there are just 35 minutes left to do it prior to the CPI release.

On the other hand maybe the number tomorrow will be soft in which case the 10 year treasury will temporarily fall back to the 2.80% level.

Ouch – Spark Energy F-to-F Tumbles

While we own only 2 perpetual preferreds personally and 1 is a fixed-to-floating rate issue there is still pain from time to time.

1 of our holdings had a big seller– Spark Energy 8.75% fixed-to-floating perpetual just dropped by a buck.

Guess they wanted out pretty bad.  Given that the shares represent 1% of our holdings for us there is modest pain, but it does show what can happen to these high yield issues with thin trading.

While we don’t build our personal portfolios with a bunch of high yield issues (quite the contrary) if you look at the partially invested High Yield Portfolio you can see that a hit like the above mentioned can take a chunk quickly.

New Purchase Made in the High Yield Portfolio

We have added a full position to the Enhanced High Yield Income Portfolio of the 8.625% Resource Capital Fixed-to-Floating rate preferred (NYSE:RSO-C).




This purchase brings this particular model up to 43% invested so we will need another 4-5 issues to finish up construction of this model.

Here are the reasons we have purchased this security for this model.

  1. The issue is fixed-to-floating rate meaning at a point 6 years in the future there is interest rate risk coverage.
  2. The issue is from a commercial mortgage REIT which helps diversify the energy heavy preferreds bought previously.
  3. Resource Capital has recently (15 months ago) drafted a plan to divest residential mortgage businesses as well as non core businesses and has executed the plan leaving them with substantial cash on hand.  Impaired assets were sold or marked to market and are for sale.
  4. The commercial real estate portfolio RSO owns is primarily senior floating rate loans.
  5. RSO was able to issue a convertible note at 4.50% while paying off convertible notes with coupons of 6 and 8%.

While we believe this issue, like all perpetuals, is susceptible to loss of capital as interest rates increase, we are willing to incur that risk to own a high yield security. Reasonable higher yield preferreds are in somewhat short supply, but given the improvements in performance coming from RSO we think this issue fits right in.

Midday Report

After hitting near 2.90% overnight the 10 year treasury has settled in to a trading range of 2.84-2.87%.  We are assuming that investors are awaiting the CPI release on Wednesday before trying to drive rates over 2.90% on the way to 3%.  It must be remembered that once rates are stable it takes a few days before investors are willing to tip toe back in–if we get a Goldilocks CPI report we would expect rates to be stable for another week and maybe we will gain a 1/2% in average capital gain on issues we own.  Of course we have only lost 3/4-1% on most the the issues so it is unlikely we can have significant bounces.

With interest rates remaining under control the average preferred/baby bond is up 1 cent–with most issues up or down 10 cents or less.  There are a few larger movers.  Colony Northstar (CLNS) has 3 issues moving 2-3% higher as they had been too severely punished for a decent REIT with high coupon preferreds.  CLNS, like Ashford Hospitality (AHT) is simply an unloved issue.

Of course everyone knows that equity prices are way up with the DJIA up another 400 points–a bit of irrational exuburance for the day.

REITs are down almost a percent again.  The retail related issues we are watching closely are mostly flat.  KIMCO (KIM) is flat at this moment at $14.19 after being as low as $13.75–current yield is 7.90%.  Realty Income (O), the cause of continuous fighting over on Seeking Alpha, is down 46 cents trading at $48.44 giving a current yield of 5.25%–a point at which we normally would be interested, but not this time.  Tanger Outlets (SKT) is just barely positive at $22.88 for a current yield of 5.99%.  Whitestone REIT  (WSR) sold off early today (must be because we just bought shares last week) going as low as $11.75 before recovering to now be at $12.11.  The sell off was caused by an investor presentation released by the company which can be found here.  We skimmed the presentation and didn’t find anything worthy of a selloff in it–but there are enough investors willing to try to read between the lines which means there are sellers based on nothing at all many times.

Utilities are flattish and MLPs are up a percent or two based on higher energy prices.

 

Monday Morning Kickoff

So another week is gone and for many investors it was an exciting time and obviously for many it was a panic time.

Interest rates traded in a fairly wide range as the movements in the stock markets drove rates down to 2.75% for part of a day (a flight to safety), but by and large rates (10 year) moved in the 2.82% to 2.89% area. We would expect pressure on rates to continue with the lower end being 2.80% and the upper end being 2.90%–for now at least as we await further economic data.

On the economic data front the most important number coming out next week will be the release of the CPI (consumer price index) on Wednesday, February 14. Year over year change is estimated at 2% with a range of predictions of 1.9% to 2.3%. Given that the FED is focused on inflation any deviations outside of this range could move markets–in particular in the interest rate complex.

After a big week of run-off of the FED balance sheet a week ago the FED actually increased the size of the balance sheet in the last week by $1-2 billion–more or less a rounding error. A week ago we wrote on what we think the outcomes of ‘quantitative tightened’ will be and it isn’t good if the FED goes down that path without adjustment on the way. The bottom line is they can run-off assets on the balance sheet or they can raise interest rates–but not both.  We shall see.

Preferreds took a bit of a hit of 6 cents on the average share (of course averages don’t tell the whole story).  We were disappointed that even the short maturity term preferreds and baby bonds moved a bit lower as the ‘spillover’ from the constant equity poundings finally drug them a bit lower.  We opined this may be coming as it always does when there are multiple day downdrafts in equities.  Of course we have been in a ‘Goldilocks’ market so long our expectations are likely a bit high.

We have 223 issues trading under $25 compared to 219 last week so with the minor price pressure and the modest change week to week in issues under $25 we may be moving to a more stable period.  If interest rates stay in our expected 2.8 to 2.9% during the coming week we may see a modest bump up in prices this week.

A few new issues traded through their 1st full week such as Fidus Investment (NASDAQ:FDUSL)5.875% baby bonds trading at $25.05 while the Jernigan Capital (NYSE:JCAP-B) 7% perpetual preferred fell a buck on Friday to trade around $23.







Sotherly Hotels (NASDAQ:SOHO) announced a new baby bond issue with a very short maturity of 3 years and a pretty decent coupon of 7.25%. A quick review of SOHO’s financials show a reasonably strong, yet small, lodging REIT. This issue is high on our list to purchase this week, both in model portfolios as well as personal portfolios.

In addition to the Sotherly baby bonds we are looking for 2 issues for the  high yield income portfolio which should get that portfolio oever 50% invested–additionally we may add some of the KIMCO common shares (NYSE:KIM) simply because we believe there is some decent capital gains that may occur with KIMCO, but we would rather miss a purchasing opportunity than to buy it too early.  For us a $14/share price (or slightly under) would be a good purchase price.

Tonight (1 am CST) the DJIA is up 175 points on the futures while the 10 year treasury is trading with a higher yield in the 2.89% area.  Hopefully we will see the 10 year treasury trade down in yield during the course of Monday as we think the next potential breach of the 2.90% area will be with the release of the CPI on Wednesday.

Good luck to all as we likely enter another exciting week.